Commentary

As vote nears, Israelis finally talk economics

Commentary: Stiglitz Zeitgeist will rejuvenate Labor, but next government will remain conservative

By

AmotzAsa-El

Columnist

JERUSALEM (MarketWatch) -- Foreigners won’t get this, but the general election Israel will hold in January will be the first to be dominated by economics in nearly half a century.

The last time an Israeli election was dominated by economics was in 1965, when the previous decade’s vigorous growth gave way to a harsh recession and double-digit unemployment. Since then, Israel’s political discourse has been dominated by issues of war and peace. Even in 1984, when Israel faced triple-digit inflation, election rhetoric was dominated by the war Israel was fighting at the time, in Lebanon.

Reuters

Israeli Prime Minister Benjamin Netanyahu.

Well, times have changed. The foreign issues Israelis once passionately debated have not become simpler, but the major parties have moved to the center, with hawkish Prime Minister Netanyahu backing Palestinian statehood while dovish Labor avoids discussing the conflict. Instead, everyone is talking economics.

Turning point: consumer wrath

The turning point was last year’s social upheaval. The sight of thousands crowding the streets of Tel Aviv and Jerusalem to demand affordable housing and lower food prices caught much of the political system off guard, sidelining key politicians who failed to detect in time the public’s changing priorities.

It was this groundswell that accelerated the rise of Labor Party leader Shelly Yachimovich and the downfall of then-opposition leader Tzipi Livni. Yachimovich’s parliamentary work focused on workers’ rights while Livni remained shackled to the diplomatic issues with which she had become familiar, and infatuated, as foreign minister.

Now, as the politicians brace for an economic election, the debate promises to be heated, and animated by much talk about compassion and solidarity. The result, however, will likely be a conservative coalition that will be more pro-market than the outgoing government.

The debate will extend from how to cap natural-gas drillers’ royalties to how to lower the price of cottage cheese, and from how to make mortgages more manageable for young couples to how to regulate overly concentrated holding companies.

Neo-socialist narrative

Inspiring all these will be the neo-socialist narrative, which demonizes big business as inherently greedy and inhuman. Such rhetoric has become fashionable since the 2008 meltdown and has recently also earned respectability with Nobel laureate Joseph Stiglitz’s condemnation in a new book, “The Price of Inequality,” of what he called “rent seekers,” an allusion to corporations that charge a lot and produce little.

In Israel, the Labor Party is tapping this Zeitgeist’s energy fairly and successfully: fairly, because that is what Labor parties should do, and successfully, because social activists are suddenly joining Labor in droves, creating an enthusiasm not seen there since the days of Yitzhak Rabin two decades ago.

Polls indicate that Labor is poised to restore its historic position as one of Israel’s two major parties, garnering about a fifth of the electorate. That’s twice as much as it won in 2009, when the party that ruled Israel during the country’s first three decades dwindled to a tenth of the legislature.

Offfice of Shelly Yachimovich

Israel's Labor Party leader, Shelly Yachimovich.

However, Labor leader Yachimovich, a 51-year-old former journalist who hasn’t held any executive office, is expected to lag behind the 63-year-old Netanyahu, who has already run for the premiership three times, won twice, and has served an aggregate seven years as prime minister, plus a term as finance minister and a stint as foreign minister.

Moreover, Netanyahu’s merger of the ruling Likud Party with Foreign Minister Avigdor Lieberman’s Israel Is Our Home Party is expected to give the prime minister much of the sizable Russian-speaking electorate.

Two-pronged attack

However, Netanyahu’s economics faces a pincer attack, by neo-socialists from one direction and religious populists from another.

The neo-socialists, led by Labor, will dispute Netanyahu’s belief in small government, low taxation and trickle-down economics, and will promise greater government spending on health and education and an expanded social safety net.

The religious side, led by the ultra-Orthodox Shas, will attack Netanyahu for being well-born, and will demand more subsidized housing, kindergartens, schools and religious seminaries for its constituents.

Netanyahu may further lose populist votes if, as many here are speculating, his popular communications and welfare minister, Moshe Kachlon, who forced cellphone prices down by encouraging competition in that industry, forms his own party.

And yet, this column’s forecast is that the next election will end with Netanyahu reelected and his new government even more business friendly than his current one.

Favorable economic numbers

The first thing that will play into Netanyahu’s hands is that the economy has performed well. While most developed economies ached, Israel’s grew consistently, inflation was under 3%, the shekel was strong, the deficits remained generally low as did the national debt and interest rates, and unemployment was kept under 7%.

Even voters who don’t know economics understand that all this is much nicer than where Greece, Spain, and even Italy and Britain have arrived. Add to this backdrop Middle Eastern turmoil from Libya to Syria and you get a preservationist instinct that says this is no time to change horses.

Moreover, the outgoing Knesset’s largest faction, Kadima, is expected to unravel, and thus release a predominantly middle-class following worth nearly a quarter of the electorate.

Reuters

Yair Lapid, a former TV anchor and the head of a new centrist party running in Israel's approaching election, delivers a campaign speech on Oct. 30, 2012.

Now a good portion of this electoral mass will fall in the hands of a new centrist party that will likely join Netanyahu’s government. Led by TV journalist and amateur boxer Yair Lapid, this party was joined by Ya’akov Peri, former CEO of Mizrachi Tefahot, Israel’s fourth-largest bank.

Lapid and Peri will oppose higher deficits and taxes, as did Lapid’s late father, Tommy, who was Ariel Sharon’s justice minister and a staunch supporter of Netanyahu’s market reforms back in 2003.

Add to these Foreign Minister Lieberman, who is even more economically conservative than Netanyahu, and you get a solid pro-market nucleus in Israel’s next government. Though he will still need coalition partners, Netanyahu will have more space to maneuver than he had during his current term, for instance, when Labor forced him to shelve his land reform.

Come February, Netanyahu may well execute, at least partly, his original plans to privatize most state-owned land and reduce corporate taxes from 23% to 18%. In addition, Netanyahu will likely replace Defense Minister Ehud Barak, whose pressure made defense spending balloon to 50.5 billion shekels ($13 billion), 8% more than its level in 2006 when he entered that office in Ehud Olmert’s government.

Barak’s fiscal appetite has burdened the budget, particularly after Netanyahu extended compulsory education to age three, following last year’s social protests. Netanyahu consequently raised the budget-deficit target to 3% of GDP from 1.5%, but his stated goal is to push it back down to 1.5% by 2016, an aim to which he must stick if he is to maintain Israel’s macroeconomic stability and attractiveness to investors.

If Netanyahu cuts defense spending and makes billions flow to the Treasury from land sales, he will be able to cut taxes while reducing housing prices and social discontent.

But even if all this is only partly implemented, it is still reasonable to predict that the coming Netanyahu government will be even more investor friendly than the outgoing one, while newly energized neo-socialists continue to await their day in the sun.

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